Measuring Market Cap: An Industry of Giants

The most valuable and dynamic fashion and beauty companies in the world are either big or fast.

The most valuable and dynamic fashion and beauty companies in the world are either one or the other.

That is one of the key takeaways of the WWD Global Stock Tracker, which launched on WWD.com Wednesday and puts 100 of the most important fashion, retail, luxury and beauty stocks in one place and — after a currency translation — on the same playing field.

Millions of investors vote every day — from New York to Hong Kong to Paris — collectively deciding who’s on their way up and who’s on their way down. It’s a never-ending distillation of everything that makes up a business, from branding and distribution to management and marketing.

The verdict? Competition is fierce and sheer size offers efficiencies of scale and market might that helps the big stay big and grow bigger — albeit at a slower pace than some of their scrappier competitors. There are a host of companies that still have speed and momentum on their side, from Michael Kors Holdings Ltd. to Under Armour Inc., that are being richly rewarded by investors.

By market capitalization — the value of all of a firm’s outstanding shares at the current price — Wal-Mart Stores Inc. is the most valuable company playing in the fashion sphere, weighing in at $247.09 billion. Beauty giant Procter & Gamble Co., a big Wal-Mart supplier, ranks as number two, with a market cap of $217.99 billion. Then there’s a big fall-off in terms of size. L’Oréal SA comes in at number three at $104.33 billion. (Market caps of companies trading on foreign exchanges are listed in current U.S. dollars for comparison sake.)

As the rankings move from the truly gigantic to the intensely large, a clear divide in customer base emerges — reflecting the squeeze felt by the middle class.

Fashion’s largest and therefore most successful players are going after the two ends of the price spectrum. The tendency is for these companies to zero in on the luxe consumer or remain laser focused on the low-income shopper.

“The hollowed-out middle class is an important part of this story,” said Jonathan Low, founding partner at Predictiv Consulting, noting that household incomes for many have been stagnant for decades.

The trend is made most visible by LVMH Moët Hennessy Louis Vuitton and Zara parent Inditex, which are vastly different companies playing in vastly different markets, but when it comes to overall value, investors view them as nearly identical.

They round out the top-five most valuable companies in the Tracker with LVMH at $96.54 billion, and Inditex at $95.12 billion.

It’s no accident that these companies find themselves on top of the heap. To be that big, a firm needs to do many things and be fairly good at all of them: It needs to be global and focused on the nuts and bolts of operations to reliably get product into the hands of consumers.

“These are all companies that have been around for a long time, for the most part, and they’ve established a huge base business, which has a bunch of assets that are going to generate value,” said Todd Hooper, partner in the private equity practice of A.T. Kearney.

Those assets include stores, brands and product development capabilities, he said.

While market cap is not the same as market share, with the former referring to a company’s value and the latter referring to how strong its positioning is in a particular area, overall stock market value does tend to hew closer to a company’s sales or sales trend than to its earnings.

Kate Spade & Co., for instance, logged net earnings of just $73 million last year. But investors chose to focus on the 61 percent sales growth at the company’s namesake brand, while pushing it to a market cap of $4.7 billion.

Growth is the story most companies sell to investors, but often it’s just a different spin on the story the company is selling consumers.

The top and quickly growing companies in the Tracker have clear brand positioning — which analysts said is perhaps the most important variable for investors.

People putting their money to work in the markets are looking for growth and security and that’s what they get in a brand, said Christine Chen, senior investment analyst at Ashfield Capital Partners.

“You’re selling the brand and the brand is selling the dream — that creates the moat [around a business],” Chen said. “Wall Street wants that moat. Wall Street values brand and growth and the two are intertwined. You can’t have growth if you don’t have a story to tell. Look at those that have fallen the hardest, it’s ones who don’t have a moat or didn’t protect that moat.”

This impulse to protect a brand has caused many companies to branch out and emphasize their own stores.

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